Indexes Overbought
Opinion: All of the indexes closed modestly higher Friday with positive internals as volumes stayed flat on the NYSE and declined on the NASDAQ. The charts were largely unaffected by the action while the data has now been pushed to levels suggestive of near term weakness increasing in probability. As such, we remain neutral/negative for the near term and neutral for the intermediate term until a positive reversal is seen in the NASDAQ A/D.
- On the charts, all of the indexes closed modestly higher Friday with positive breadth. However volumes were flat to down while breadth slackened from the action earlier in the week. The COMPQX (page 3) closed at resistance along with the DJT (page 3) and RUT (page 4) while the DJT closed above its downtrend line from last March, a positive event. However, all of the stochastic levels are now in the upper 90s implying the potential for some near term risk.
- Some important data is echoing the stochastic message as the majority of the McClellan OB/OS Oscillators are overbought (NYSE:+133.04/+55.05 NASDAQ:+86.9/+5.84), especially the NYSE 1 day. The WST Ratio and its Composite are on bearish signals as well at 67.7 and 177.8 while the OEX Put/Call Ratio (smart money) shows the pros having loaded up heavily in puts at 2.65 as they expect some rough water ahead. As well, although the Gambill Insider Buy/Sell Ratio remains neutral at 10.5, insider buying activity has slowed notably over the past few sessions implying their belief that the buying sweet spot has passed for the moment. So as a whole, we believe there is enough weight on the data scales to warrant some near term caution. While the NASDAQ A/D has seen some further improvement, it has yet to reverse its current downtrend leaving us neutral for the intermediate timeframe.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.29% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.83 versus the 10 Year Treasury yield of 2.1%.
SPX: 1.951/2,044
DJI: 16,302/17,284
COMPQX; 4,552/4,830
DJT: 7,850/8,427
MID: 1,385/1,462
RUT: 1,103/1,163